By Brian Hilyard
Money and Investing Writer
Jerome Powell appears to remain dovish on interest rates as long-term Treasury yields continue to spike. While undermining the equity markets overall, inflation is nowhere near the Fed’s 2% target, and the labor market has not returned to full employment.
It is interesting to note that although rising yields mean higher borrowing costs for corporations, the hardest hit sector is tech, which is atrociously cash-rich. If any tech companies wanted to leverage up, they did so last year when rates plunged to near 0.
Powell noted that even if the unemployment rate dropped to pre-pandemic levels, market participants should also keep an eye on the participation rate.
If an individual stops looking for work, they are not included in the unemployment statistic, lowering it. A low unemployment rate with a high participation rate is considered full employment by the Federal Reserve. Powell stated that it would be “highly unlikely” that we get there this year.
Even then, the Federal Reserve would wait for a tightening labor market to cause rising wages, putting inflationary pressure on the price of goods.
Commenting on rising long-term bond yields, Powell pointed out that the pricing is not irrational. From the Fed’s point of view, the market is working as it should, giving it no reason to intervene further.
When asked to provide guidance on when investors could expect the Federal Funds Rate to increase or change to its asset purchases, the chairman said that its decision will always be outcome-based, not time-based.
Rather than saying a 25 bps hike will occur in early 2023, for example, the hike will come when its goals are met. He was careful to not reveal his thoughts on when the Fed could start considering changes.
From his interview, it seems that the Federal Reserve will resist making any changes to interest rates or asset purchases until we are in a period in which inflation stays above 2% for some time. This may not happen until Jerome Powell’s term is over.
Contact Brian at firstname.lastname@example.org